Questions for Barden, Bluhm, and the Board
Policy Brief :An electronic publication of The Allegheny Institute for Public Policy July 29, 2008 Volume 8, Number 48 The ongoing saga of the Pittsburgh slots casino continues to dredge up new questions about the licensing process, the proposed ownership group, and casino financing that Don Barden, Neil Bluhm, and the Gaming Board need to answer. The citizens of the Commonwealth have a right to know what’s going on. Here is the question that should have been asked at the very beginning of the licensing process. Did Mr. Barden have the financing in place to build the casino when he was awarded the license? After all, this should have been the key element in his winning of the license. According to the Gaming Board’s report he had secured “firmly committed financing” from Jefferies & Co. for over $450 million—which at the time was thought to be enough to build the casino. Indeed, in a December 2007 newspaper account covering the groundbreaking for the casino, the cost was placed at $450 million. The current estimate is $780 million, a jump of 73 percent. Was there actually a firm commitment in place in December 2006 when the license was awarded as the Board report indicates? If there was, what caused it to disappear within months of the license being awarded? One of the arguments has been that lawsuits delayed the start of the project driving up costs. In fact however, ground was broken within a year of the license award. By way of comparison, neither of the two Philadelphia casinos are under way. Moreover, costs are unlikely to jump 73 percent in one year. Was the $450 million construction cost estimate deliberately low? And even more important, what documentation did the Board have from Jefferies & Co. that gave them the confidence to conclude that a “firm commitment” of funding was in place? Was the Board mislead or did they simply fail to do appropriate due diligence? In any event, the money from Jefferies & Co. obviously did not materialize forcing Barden (PITG Gaming) to borrow funds to get construction underway—a $200 million bridge loan from Credit Suisse. The next question for PITG and Mr. Barden is simply this: Where did this money go? Less than four months into construction, there were no funds to cover work done in April, May or June. By comparison, PNC is building a 23 story office, hotel and residential complex for $170 million total. While the gaming law clearly states that no owner shall hold a majority of two casinos within the Commonwealth, Mr. Bluhm’s High Penn Gaming in Philadelphia will be majority controlled by him or trusts of family members, which of course he has considerable influence over. So, on the surface it seems Mr. Bluhm and his firm’s interests would be disqualified from owning more than a small share of Pittsburgh’s slots parlor, not the proposed 75 percent share. However, due to legal niceties regarding ownership as opposed to effective control, he could end up with effective control of two casinos in Pennsylvania. These and other similar issues have also caught the attention of lawmakers who are calling for the Gaming Board to remove Mr. Barden’s license and start the process from scratch. A State Senate committee called a hearing on the matter where they questioned Mr. Bluhm, the leader of the group attempting to take over the Barden casino. Mr. Bluhm warned that if the Gaming Board does not approve his take over bid by July 30, Credit Suisse will foreclose and force the North Shore project into bankruptcy with the attendant legal and financial wrangling that will ensue, delaying the casino for months if not years. But is that threat plausible? Would Credit Suisse, the holder of the bridge loan, really foreclose on the stalled North Shore Casino if it is not paid back by July 30, 2008? This seems somewhat unlikely since the process of finding a buyer for the property and the semi-completed structure could lead to greater losses for the bank than waiting to collect from new investors who have been thoroughly and completely vetted by the Board. Finally, some questions for the Gaming Board. Why did they give the license to Mr. Barden, who apparently had to borrow the money to purchase the license? They should have demanded an appropriate equity stake from the owners and insisted on confirmed in-the-bank financing for the project —two things Mr. Barden lacked. They certainly should not be allowed to rush to judgment and give a green light to the license grab by the Bluhm led investors. The license is worth at least $50 million and the state has every right to take it back and find another licensee. This is an extraordinarily complex situation with many questions and not many answers. Clearly, the licensing process was mishandled from the start. The Gaming Board now has an opportunity to get it right. They must properly vet the new ownership group and make sure the financing is secure before proceeding. Indeed, they probably should reopen the entire process and see if there are other applicants who might come up with a better offer than Bluhm has put forth. Some healthy competition is always a good bet in situations such as this. Jake Haulk, Ph.D., President Frank Gamrat, Ph.D., Sr. Research Assoc. Please visit our blog at alleghenyinstitute.org/blog. If you have enjoyed reading this Policy Brief and would like to send it to a friend, please feel free to forward it to them. For more information on this and other topics, please visit our website: http://alleghenyinstitute.org If you wish to support our efforts please consider becoming a donor to the Allegheny Institute. 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